Employee share plans have become a popular tool for companies to incentivize and retain top talent, particularly in multinational corporations. These plans offer employees an opportunity to have a share of the company's success, but they also come with complex tax implications. This blog post aims to shed light on the main tax and social security implications of cross-border employee share plans in Finland and what companies and employees should be aware of when engaging in share-based incentive schemes.
In Finland, share plans are generally subject to both income tax and social security contributions. The income tax is typically based on the fair market value of the shares at the time of exercise, and the social security contributions are principally calculated based on the same value. However, depending on the structure of the share plan and its terms and conditions, the taxable value of the benefit or the timing of the taxation may differ. Moreover, Finnish tax legislation contains a few beneficial tax schemes in which case the benefit arising for the employee may be partly or fully tax-exempt.
In addition to the employees’ liabilities, there may be Finnish employer obligations to fulfill for foreign or Finnish companies while implementing an employee share plan. For instance, the employer may be subject to employer’s social security contributions, or the employer may be liable to withhold tax on employee’s cash salary or report the taxable benefit to the Finnish authorities.
It's important to keep in mind that different countries have different regulations regarding employee share plans, especially in cross-border situations. Hence, as the case is for example with wage income, also the benefit arising from an employee share plan may be taxed in more than one country. For instance, even if the employee is not a resident of Finland for tax purposes, the benefit may still be subject to tax in Finland.
Some key factors that impact the Finnish taxation and social security contributions of employee share plans in cross-border situations are:
- Type of the employee share plan: There are several different employee share plans such as stock options, long-term incentive or performance share plans & share matching plans. Depending on the plan and its provisions, the benefit arising from such a plan may be taxed at a different point of time and could be subject to different social security contributions. As already mentioned above, the Finnish tax legislation includes some favorable rules that apply to certain share incentives and whose aim is to alleviate the tax implications of incentivization of employees. Under those rules, the taxable value of the shares received by the employee could be lower than the fair market value.
- Residence of the employee: The country of residence of the employee will impact the amount of tax that the employee must pay on the taxable benefit arising. For example, if the benefit arises while residing in one country, the employee may be subject to tax in another country. Finnish tax residents’ share plan income is generally taxed progressively as earned income, while Finnish tax non-residents’ share plan income is generally taxed with a tax-at-source rate.
- Tax treaties: The tax treaty between the two countries can impact the taxation of employee share plans. For example, if there is a tax treaty between the two countries, the tax treaty may prevent Finland from taxing certain types of income. Additionally, the tax treaty defines which country is liable to eliminate double taxation in case the income is taxed in both the source country and the country of residence.
On top of the above key factors which impact the Finnish taxation and social security contributions, the domestic tax laws of each country will impact the taxation of the employee share plans. For example, some countries may have specific rules regarding the taxation of employee share plans, such as favorable tax and social security treatment for long-term options or restricted stock units.
To conclude, the taxation of cross-border employee share plans in Finland is a complex area that requires careful planning and attention to detail. Companies should be familiar with tax laws and regulations in order to ensure that their employee share plans are compliant with all relevant regulations and that the participating employees will not face any unexpected tax implications. In cases that are subject to interpretation, it is often recommended to apply for a preliminary ruling from the Finnish tax administration. With a preliminary ruling, the employer (and the employee) can ensure the tax and social security treatment of the plan. It is also worth noting that tax laws and treaties change over time, so it is crucial to stay updated on the latest developments.
Fiscales has been involved in a large number of cross-border share plan cases. We have assisted both employers and employees, Finnish and foreign.
